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Taxpayers Should Prepare Now for GILTI and FDII

February 5, 2018, Tax Notes

Michael Caballero spoke at a District of Columbia Bar Taxation Community event and is quoted in a Tax Notes article examining why taxpayers should evaluate their current structures to minimize their potential tax burdens from global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII). According to Caballero, an issue affecting taxpayers arises in the context of the dividend received deduction (DRD) and in particular, dividends received from CFCs with a hybrid entity classification. "For the most part, I think this is a trap for the unwary. If you get a dividend from a CFC and it's a hybrid dividend - so it's deductible abroad - you don't qualify for the DRD and importantly, if you have hybrid dividends that are bubbling up through the system of CFCs, those are not qualified for the DRD and are going to immediately flip into subpart F income," Caballero said. "So if you have income earned offshore and you pay it up through an entity that is a hybrid, you're going to end up going from 0 percent tax on those earnings to full 21 percent tax immediately, and without foreign tax credits. Identifying hybrid instruments in your structure is critically important, especially in a world where everyone is going to want to start paying back those earnings that are offshore as soon as possible."

There is some uncertainty for taxpayers with hybrid CFCs because of the ambiguity of the definition of a hybrid dividend, Caballero said. He added that guidance will be needed regarding what is considered an "other tax benefit" under the statute.

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